The South African mining industry - is a crisis imminent?

Transcription

1 The South African mining industry - is a crisis imminent? Address by Peter Leon Partner and Co-Head of Mining, Energy and Natural Resources, Webber Wentzel, Johannesburg Co-Chair, Mining Law Committee, International Bar Association to MineAfrica PDAC conference Toronto 6 March 2011

2 Asked about the historical impact of the French Revolution of 1789, Zhou Enlai, Premier of the People's Republic of China, from 1949 until his death in 1976, is said to have remarked "it is too soon to say". When faced with the question as to whether there is an existential crisis in the South African mining industry, I can only observe, similarly, that "it is too soon to say". Unfortunately, this question cannot be too easily dismissed, particularly as it refers to a key sector of the South African economy, which accounts for over five per cent of South Africa's GDP, provides employment to some workers directly and a further indirectly and contributes a third of the country s exports. 1 South Africa's in situ mineral resources are estimated at US$ 2.5 trillion, the largest in the world. 2 Indeed, despite its unhappy association with colonialism and apartheid, South Africa s mining industry is the raison d etre of the country s industrialisation and its US$ billion economy, the largest by far in Africa. 3 The mining sector in South Africa, however significant, has unfortunately been plagued by regulatory uncertainty over the past ten years. This can be attributed to the fact that the Mineral and Petroleum Resources Development Act, 2002 ("MPRDA"), 4 the regulatory cornerstone of the industry, is riddled with vague regulatory provisions, as well as others which vest an inordinate amount of administrative discretion in decision makers. 5 Further, several mining companies have recently been affected by instances of maladministration as well as bureaucratic inefficiency on the part of the Department of Mineral Resources ( the DMR ). Furthermore, since mid-2009 the spectre of nationalisation has reared its ugly head. 1 McKinsey & Company, "Global competitiveness of the SA mining industry", 15 January Citibank has identified South Africa as having the largest in situ resource value of any country in the world, with mineral deposits estimated at USD 2.5-trillion. See Attitudes becoming 'more hostile' to mining in 80% of jurisdictions Fraser Institute, Mining Weekly, 20 August A 2010 estimate of the Gross Domestic Product see 4 Act 28 of The MPRDA fails to provide for a number of technical issues including the mining of mixed or associated minerals as well as the concept of undivided interests in mining rights. It vests unfettered discretion in the Minister, notably as regards the issue of new order rights. For example, the MPRDA requires that a social and labour plan be prepared, submitted and complied with by applicants in order for them to obtain and continue to hold mining rights granted or converted under the MPRDA. The required content of such a social and labour plan is set out in regulation 46 to the MPRDA. Regulation 46, however, uses such broad terms that it is unclear exactly what must be provided for in a social and labour plan. 2

3 Despite the longest sustained commodities boom in the twentieth century, 6 between 2001 and 2008, the mining industry in South Africa conversely declined in size, 7 demonstrating a one percent negative growth rate, measured in value add to GDP. 8 According to the Canadian Fraser Institute, South Africa continues to slip down the "policy potential index", ranking the attractiveness of mining destinations to investors, from 27 out of 47 countries in the 2002/2003 period, to 67 out of 79 countries surveyed in the 2010/2011 period. 9 This forty five place fall represents a precipitous 28 per cent decline in the country's standing. There has similarly been a marked drop in the number of South African mining and metals transactions over the last decade, with deal values falling an alarming 77.8 per cent from US$ 13 billion in 2001 to US$ 2.9 billion in This is in stark contrast to the rest of the world and can, to a large degree, be linked to regulatory uncertainty. Between 2001 and 2008, the global mining industry grew by just under five percent per annum. 11 In more stable mineral regulatory regimes, such as Australia, the mining industry advanced by more than four per cent annually. 12 To be fair, the DMR is taking some positive steps, with the recent announcement by the Minister of Mineral Resources ("the Minister") of a series of measures which, once implemented, should result in improvements to the overall regulatory environment. 13 I address these measures in more detail below. 6 This assertion is confirmed by Roger Baxter in The global economic crisis and its impact on South Africa and the country's mining industry, South African Reserve Bank, Conference Papers on Challenges for Monetary Policy-makers in Emerging Markets held 29 to 31 October The Fraser Institute's 2010/11 survey of mining companies notes that, during the past decade, South Africa has steadily fallen in the policy potential index rankings from a position of 27 out of 47 ranked jurisdictions in the 2002/2003 survey, to 67 out of 79 in the 2010/2011 survey. 8 McKinsey & Company, op cit, note 1. McKinsey highlighted three factors in particular affecting regulatory certainty. The first is the effect of converting old order rights to new order rights has on security of tenure. The second factor relates to the series new changes to the law (such as the MPRDA and the Mining Charter) which remain somewhat ambiguous. The third factor identified was taxation and here McKinsey pointed to the potential introduction of a new royalties tax. 9 Fraser Institute Annual Survey of Mining Companies 2010/2011, Fraser Institute, 3 March Africa is still golden, Study of Mining and Metals in Africa by Ernst & Young, 10 February Ibid. 12 As measured by Gross Value Added to the economy see Year Book of Australia, Issue 87, by the Australian Bureau of Statistics. 13 Address by Minister Susan Shabangu: New Electronic Mineral Management System and its implications for the Regulatory Framework at Cape Town, on 7 February

4 Regulatory uncertainty and maladministration in the mining sector In order to understand how the crises in the South African mining industry have come about, one must understand the regulatory transition of this industry since the pre- MPRDA regime. Since 2004, when the MPRDA took effect, a difficult relationship has existed between the mining industry, saddled by its past, and the democratic South African government with its ambitious agenda of socio-economic transformation. As the centrepiece of the government s mineral law reform, the MPRDA introduced the notion of state custodianship of South Africa s mineral resources, thus replacing absolute rights of mineral ownership under the common law with conditional and time-bound state licences. This state licensing system, in turn, is subject to significant administrative discretion. This unfettered discretion has been the source of persistent regulatory problems in the industry. There have, during the past year, been a number of instances of maladministration. The most notable being between a subsidiary of Kumba Iron Ore Limited ("Kumba"), Sishen Iron Ore Company (Pty) Ltd ("Sishen"), 14 the DMR and Imperial Crown Trading (Pty) Ltd ("ICT"), which is ongoing. Ironically, this case is playing out just as the DMR is taking positive steps to re-position the regulation of the industry. The facts of this matter are, briefly, the following: Sishen held a 78.6 per cent undivided share in an old order mining right over the iron ore and manganese ore mined at the Sishen mine. ArcelorMittal South Africa (Pty) Ltd ("ArcelorMittal"), a subsidiary of ArcelorMittall Ltd, held the residual 21.4 per cent undivided share in the same right ("the residual share"). Under the MPRDA's transitional provisions, Sishen duly converted its 78.6 per cent undivided share in the Sishen mine mining right into a new order right well before the conversion deadline of midnight on 30 April ArcelorMittal, on the other hand, inexplicably failed to do so. Sishen then immediately applied for a mining right for the residual share which ArcelorMittal had forfeited. This application was physically lodged on 30 April Kumba holds 74 per cent of Sishen, while Exxaro Resources Limited holds 20 per cent. The remaining 6 per cent is held, in equal proportions, by an employee share participation scheme called Envision and a community development trust. 4

5 owing to the fact that 1 May 2009, the first day after ArcelorMittal's residual share ceased to exist, was a public holiday (on which the offices of the DMR were closed). 15 Under what Sishen describes as an agreement with officials at the Kimberley and Pretoria offices of the DMR, Sishen's application was forward stamped "1 May 2009". 16 On 4 May 2009, the first working day after the May 1 public holiday, Sishen's application was accepted by the DMR. It later transpired that an application for a prospecting right over the entire Sishen mine had purportedly been lodged by a newcomer to the mining industry, ICT, on the same day. On 21 May 2010, Sishen lodged a judicial review application in the High Court to set aside the DMR's decision to grant ICT's application. This application will now be heard later this year. What subsequently transpired raises concerns about the administration of South Africa's mineral regulatory regime, as well as the degree to which political connectivity may impact upon it. ICT's application was granted in part by the DMR's deputy director-general on 30 November This partial grant in turn related to the 21.4 per cent residual share forfeited by ArcelorMittal. In essence, ICT was granted a prospecting right which differs materially from the one for which it applied, in relation to an iron ore mine which has been operational since According to media reports, as well as Kumba's affidavit in the judicial review proceedings, ICT's application appears not to have been lodged on the same day as Sishen's application as several documents comprising the application bear signatures dated after 4 May Further, Kumba has pointed out that ICT's application lacked several of the requisite documents. 18 In the circumstances, it does 15 Kumba's Judicial Review Application - Founding Affidavit by Robert Johann Botha, at para Ibid. 17 The application form itself is dated 5 May Kumba's Judicial Review Application - Founding Affidavit by Robert Johann Botha, at para 39. An applicant for a prospecting right is required under the MPRDA to lodge, as part of its application, plans regarding the land to which the application relates. ICT s plans regarding the Sishen mine property appear to have been dated on either 8 or 9 May Kumba's Judicial Review Application - Founding Affidavit by Robert Johann Botha, at para Ibid. 5

6 not appear possible for ICT to have lodged a complete and valid prospecting right application on 4 May Sishen has also alleged that ICT fraudulently extracted and used key data from portions of Sishen's application for a mining right over the long weekend of 1-4 May What is more concerning is that Kumba has alleged that the then deputy director-general, Jacinto Rocha, granted the ICT prospecting right contrary to the express written views of two senior officials in the DMR's head office, namely the director responsible for licensing and legal compliance as well as the chief director responsible for mineral regulation, both of whom recommended that the ICT application be refused. 21 The DMR, in its answering affidavit, has vehemently denied Sishen's allegations, arguing that Sishen, not ICT, engaged in improper conduct by "forward dating" its application and attempting to persuade DMR officials to accede to this arrangement. 22 Further details regarding Sishen and the DMR's arguments, not to mention ICT's version of events, are expected to be revealed during the hearing. In the interim, the case has raised concerns in the industry about the rule of law, the grant of rights to the politically connected as well as security of tenure. It is notable that shareholders in ICT include Sandile Zungu, the chair of President Zuma's BEE advisory panel, as well as the president's son, Duduzane Zuma Kumba's Judicial Review Application - Founding Affidavit by Robert Johann Botha, at para "ICT 'forged Kumba application", MiningMx, 29 August Kumba has also argued in its judicial review application that ICT's prospecting right application patently failed to comply with the requirements of the MPRDA. This is because, amongst other things, at the time of ICT's application, Sishen held a mining right for the same mineral and land (ie the converted 78.6 percent undivided share in the Sishen mining right). Under section 16(2)(b) of the MPRDA, the Regional Manager may only accept an application for a prospecting right if it fulfils the requirements for lodgement and only if no other person holds a mining right for the same minerals over the same portion of land. ICT's application met neither of these conditions and the Regional Manager was accordingly obliged to refuse to accept it, let alone grant it. Kumba's Judicial Review Application - Founding Affidavit by Robert Johann Botha, at para Ibid. 22 Paragraphs 38-40, 99 and 114 of the DMR's Answering Affidavit of 27 January This document can be found on the DMR's website: 23 According to the Companies and Intellectual Property Registration Office ("CIPRO") and media reports, ICT's management is made up of a host of ANC-connected individuals and companies.arcelormittal SA needs BEE deal to secure mining rights, Business Report, 11 August

7 Another unfortunate example of maladministration lies in the DMR's handling last year of Lonmin PLC's ("Lonmin's") rights to its platinum mines in the Marikana area in the North West Province. On 3 August 2010, the DMR ordered Lonmin to immediately cease the mining and disposal of all "associated minerals" on its leased properties in the Marikana area. 24 The DMR's explanation was that Lonmin had never had the right to mine and dispose of these associated minerals and, thus, was doing so illegally. Although Lonmin had successfully applied for the conversion of its platinum group metals old order rights between 2006 and 2008, it only applied, under section 102 of the MPRDA, to extend its new order mining rights to include the right to mine and dispose of associated minerals in December Under section 102, a mining right holder is only allowed to amend or vary its mining right, which includes extending the mining right to include additional minerals, if it has the Minister's written consent to do so. 25 At the time of the DMR's order, Lonmin had not yet been granted the right to mine and dispose of associated minerals under section 102. The DMR, in its media statement of 10 August 2010, observed that "a number of major companies realised the need to [apply for the inclusion of associated minerals in their existing mining rights under section 102 of the MPRDA] in addition to lodging applications for the conversion of their old order rights to new order rights. Companies which did so, are now, under the new dispensation, in a position to conduct their operations as they did prior to the commencement of the MPRDA, as the [s]tate has granted them the right to mine for associated minerals." 26 The DMR further stated that it had been "puzzled by the fact that Lonmin chose not to apply for the inclusion of these minerals earlier". 24 The platinum group metal classification includes platinum, palladium, rhodium and gold amongst others. 25 Section 102 of the MPRDA states: "A reconnaissance permission, prospecting right, mining right, mining permit, retention permit, technical corporation permit, reconnaissance permit, exploration right and production right work programme, mining work programme, environmental management programme, and environmental management plan may not be amended or varied (including by extension of the area covered by it or by the addition of minerals or a share or shares or seams, mineralised bodies, or strata, which are not at the time the subject thereof) without the written consent of the Minister." 26 "Statement: Lonmin Plc did not lose mining rights", Business Day, 10 August

8 In March 2009, Keysha Investments 220 (Pty) Ltd ("Keysha"), a member of the HolGoun group of companies, applied for a right to prospect for associated minerals on a portion of Lonmin's mine. 27 This application was granted. On the face of it, the DMR's decision to grant Keysha's prospecting right application is not unlawful, as it appears that Lonmin did not have the right to mine and dispose of associated minerals in respect of that particular portion of land. There are, however, a number of questions regarding the DMR s argument, as well as its grant of Keysha s application. In addition to a number of drafting inadequacies and lack of clarity in the MPRDA exposed by this saga, 28 it has given rise to the following issues: in May 2009, Lonmin objected to, and appealed against, Keysha's prospecting right application. This objection, made to the then Department of Minerals and Energy, was referred to the Regional Mining Development and Environmental Committee ("REMDEC") for resolution. The DMR has yet to consider Lonmin's appeal and, despite the fact that the REMDEC 27 According to the DMR, no prior applications had, at that time, been made regarding associated minerals over this property, and thus "the Department had no choice but to process the Keysha application in terms of the 'first come, first served' provisions of the [MPRDA]", and to grant it, which the DMR did in May 2010 ("Statement: Lonmin Plc did not lose mining rights", Business Day, 10 August 2010). first, the Lonmin issue indicates that the current regulatory regime is unclear about associated minerals. In particular, the MPRDA failed to clarify what procedures mining companies were required to follow for the conversion of their old order rights relating to associated minerals. Prior to the MPRDA and under the Minerals Act, a party authorised to mine any mineral could also mine and dispose of any associated minerals. The MPRDA, however, does not make provision for the prospecting or mining of associated minerals; the DMR appears not to have furthered the MPRDA's transitional provisions (the Transitional Arrangements are found in Schedule II to the MPRDA). 28 These arrangements are meant to provide a seamless interface between the previous regulatory regime and MPRDA regime. One of their objectives is "to ensure continuity of tenure is protected in respect of mining operations"; and finally, it is clear that the DMR has always known that Lonmin has mined and disposed of associated minerals. This is evidenced by the fact that, under Lonmin's mining work programme, compliance with which was a term of Lonmin's converted mining rights, the Minister imposed a positive obligation on Lonmin to dispose of all minerals recovered from the mine. 28 This is contrary to the DMR's assertion that it only became aware of Lonmin's mining and disposal of associated minerals when it conducted routine inspections prior to deciding whether or not to grant Lonmin's section 102 application. 8

9 proceedings have not been finalised at the time, it granted Keysha's prospecting right application in May 2010; 29 and there is the worrying role of HolGoun's principal and erstwhile Lonmin board member, Sivi Gounden. Gounden resigned from the Lonmin board in October 2009 after his company had applied for a prospecting right in direct competition with Lonmin. His wife, Vanessa Gounden, is one of the directors of Keysha. 30 The other director of Keysha is Miriam Sekati, who chairs the Intelligence Services Council, the human resources arm of the Department of State Security. 31 Sivi Gounden's connections likewise raise questions as to how Keysha was aware of Lonmin's alleged failure to apply for new order rights regarding associated minerals. Lonmin is awaiting the outcome of its appeal and will then decide whether to take the DMR's decision to grant Keysha's prospecting right application on judicial review. 32 As regards the DMR's order of 3 August 2010, the DMR, in a letter to Lonmin of 11 August 2010, rescinded its order and confirmed that Lonmin's section 102 application was approved, except with regard to the portion of Lonmin's leased property which is subject to Keysha's prospecting right. 33 In plain English, this means that none of this should have happened had the DMR processed Lonmin's application more expeditiously. Even if all these issues come to nought, and the DMR's decision is justified, it is troubling that the Department did not engage more effectively with Lonmin when it ordered it to cease the mining and disposal of associated minerals, and only belatedly granted Lonmin's section 102 application after significant market disturbance, negative media publicity and considerable damage to South Africa's reputation as an investment destination Affidavit of Albert Jamieson in Keysha Investments 220 (Pty) Limited and others v Minister of Mineral Resources, (case no /2010), at paras "'I have conducted myself with full integrity' Sivi Gounden on Lonmin dispute", Mining Weekly, 6 August "Intelligence link in row on Lonmin mine rights", Business Day, 10 August Lonmin plc Final Results Announcement 15 November 'Lonmin allowed to sell minerals", Moneyweb, 11 August "South Africa's DRC moment?", Mail & Guardian, 13 August

10 These cases illustrate the presence of politically connected individuals who benefit from an opaque licensing process, not to mention an administration which seemingly allows them to do so. This raises serious issues regarding security of tenure, the lifeblood of any effective mineral regulatory regime given the long term, capital intensive nature of the mining industry. A flawed Black Economic Empowerment policy The potential for future crises in the South African mining industry, however, is not simply limited to a discretionary licensing system and issues of maladministration. A possibly more serious source of uncertainty is the exigent pressure for substantial socio-economic transformation in South Africa and the government's apparent failure to address the issue properly. In order to meet its ambitious socio-economic transformation objectives, the government, following the enactment of the MPRDA, published the Broad-Based Socio-Economic Empowerment Charter for the South African Mining Industry of 2002 ("the original Mining Charter"), 35 which was substantially amended on 13 September 2010 ("the revised Mining Charter"). 36 The intention behind both the original and revised Mining Charter was to champion the government's Black Economic Empowerment ("BEE") policy, which itself is an attempt to deracialise the economy by requiring mining companies, inter alia, to divest equity in favour of black South Africans Published in the Government Gazette No of 13 August The original Mining Charter brought with it increasing regulatory uncertainty as it was written in vague, non-legal language and, except for equity divestiture, did not either set out measurable objectives, or how its aims and objectives were to be met by stakeholders. 36 Published in the Government Gazette No , on 20 September The clear intention of the revised Mining Charter, which maintained the equity targets set under the original Mining Charter, was to accelerate BEE in the mining sector in the lead up to the African National Congress' National General Council ("NGC") meeting, which took place from 20 to 24 September The need for such acceleration itself flowed from two factors. The first is the government's dissatisfaction with transformation in the mining industry. According to a recent government finding, only 8.9 percent BEE ownership of the mining industry was met by May The source is the Minister s speech of 13 September 2010, the announcement of the revised Mining Charter. The second is to contain the exigent calls from the ANC youth league for the nationalisation of South Africa's mining industry. 37 The original mining Charter thus required companies to demonstrate that 15 per cent and 26 per cent of their assets, whether through equity, attributable units of production, collective investment schemes or partnerships, are owned by historically disadvantaged South Africans by May 2009 and May 2014, respectively. 10

11 The promotion of BEE in the mining sector has, ironically become a catalyst for the populist support for the nationalisation of South Africa's mines. This is because both the original and revised Mining Charters promote a form of "narrow" BEE, resulting in the enrichment of the well connected few, as opposed to the economic empowerment of workers as well as poor and marginalised black communities, who should be the principal beneficiaries of BEE. An example of the promotion of narrow BEE can be found in the fact that, while the revised Mining Charter requires that BEE transactions ascribe to the aspirational goal of bringing about "meaningful economic participation" (ie by including workers and communities as beneficiaries), it, confusingly, requires that the beneficiaries chosen are vested with "effective ownership", which entails the beneficiaries holding direct "ownership, voting rights, economic interest and management control of mining entities. This effectively precludes broad based share schemes with communities and workers as their beneficiaries. Such schemes tend to be in the form of a trust which holds shares in a mining company. Generally, these trusts are structured in such a way that the trustees exercise the voting rights attaching to the shares on behalf of the community as a collective, and receive dividends on behalf of the beneficiaries, among whom the dividends are then divided. 38 The underlying pressure for real socio-economic change and the government's apparent failure to respond to this challenge adequately are important contributors to the industry's current problems. According to Empowerdex, during the period 2004 to 2008, of all the BEE transactions conducted in the mining sector, 39 only "7 per cent of the mining sector transactions involve[d] employee share schemes directly" and "only 10 per cent involve[d] community schemes". 40 Politically connected and already empowered individuals seem to be the primary beneficiaries of a policy that was originally intended to benefit a broader class of previously disenfranchised black South Africans. The majority of South Africans who were disadvantaged by the racist economic policies of the past are simply not benefiting from the government's key 38 See clause 2.1 of the revised Mining Charter. 39 See A summary of the BEE transactions in the mining sector , published by Empowerdex, 27 October Empowerdex states that between 2004 and 2008 there were 115 reported BEE deals in the mining sector with an estimated total value of 102 billion rand. 40 See A summary of the BEE transactions in the mining sector , published by Empowerdex, 27 October

12 empowerment policy. 41 A flawed BEE policy will continue to fuel discontent among the historically underprivileged majority in South Africa. This is likely to strengthen the hand of those stoking the fires of nationalisation. The spectre of mine nationalisation As the demands for true socio-economic transformation increase, so too do the demands for mine and other resource nationalisation. A recent source of populist pressure for the nationalisation of the country's mining industry in South Africa stems from the ANC's Youth League. Some eighteen months ago, Julius Malema, the ANC Youth League president, called for the nationalisation of South Africa s mines. 42 This call began an intense and very public debate within the tripartite alliance, the ANC's electoral partners. 43 At the ANC's National General Council ("NGC") meeting in September 2010, it was decided that the issue of mine nationalisation would be researched and a final decision delayed until December 2012, at the ANC s next elective conference. Despite the Minister's commendable attempt to quell concerns regarding the mine nationalisation issue in her mining indaba comments on 8 February 2011, 44 the NGC s decision to defer the mine nationalisation issue until December 2012 creates a real cloud of uncertainty over the South African mining industry. Most recently, the ANC s highest decision making body, its National Working Committee, appointed a research team to investigate the feasibility of mine 41 The best example of broad based empowerment, is the rather unique case of Royal Bafokeng Holdings (Proprietary) Limited ("Royal Bafokeng Holdings"). This company manages and develops the commercial assets of the Royal Bafokeng Nation, a traditional community, which has over decades, including the heyday of apartheid, prudently invested in communal assets including land and later minerals. In 2005, Impala Platinum Holdings Limited concluded a BEE transaction with Royal Bafokeng, which saw the Royal Bafokeng Holdings take a 13.4 per cent stake in Impala Platinum. Impala s transaction with Royal Bafokeng Holdings is one of only a handful of examples of true broadbased empowerment as the entire community, people, all of whom are historically disadvantaged South Africans, are the beneficiaries of the diversified asset manager. See Impala finalising empowerment deal, MiningMX, 27 November 2005, as well as Implala Platinum s official website 42 Statement issued by Julius Malema, Why we need to nationalise the mines, Politicsweb, 6 July Aki Wilhelm, 'The see-saw of nationalisation', Inside Mining, July 2009, in which the author describes the proponents such as ANC Youth League leaders and ANC members of parliament such as Fred Gona, versus vocal critics such as the Minister and ANC Secretary General Gwede Mantashe. 44 Official welcome speech to the Mining Indaba by Ms Susan Shabangu, MP, Minister of Mineral Resources in Cape Town on 8 February

13 nationalisation. 45 This committee contains several independent researchers to whom the ANC Youth League has now objected, arguing that nationalisation should simply be introduced as government policy regardless of the results produced by independent research. 46 The state-owned mining company Although it is far from clear whether the ANC (and in all likelihood the next government elected in 2014) will embrace a policy of nationalisation, it is clear that the current Administration is more assertive about the exploitation as much as the patrimony of South Africa's treasure trove of mineral resources. This first became evident with the 2007 resurrection of the state-owned mining company, African Exploration Mining and Finance Corporation (Proprietary) Limited ("African Exploration"). 47 President Zuma, in his recent State of the Nation address, indicated that the African Exploration would form the nucleus of a fully-fledged, future state owned mining company. 48 On 26 February 2011, African Exploration opened its first coal mine at an initial cost of R130 million 49 in South Africa's eastern Mpumalanga Province. 50 As an indication of the company s future intentions, African Exploration is currently applying for 128 prospecting and mining rights in South Africa. 51 Although the mining industry has, rather surprisingly, not opposed the creation of a state-owned mining company, it has insisted that it operate at a level playing field with the private sector. So far, the scales are tilted in the other direction. Shortly after 45 See ANC names top team to research mines policy, Business Day, 23 February 2011, which named the four person committee: Paul Jourdan an independent researcher at the University of Witwatersrand, Pundy Pillay and Margaret Chitiga-Mabugu of the Human Sciences Research Council as well as an un-named official from the Development Bank of Southern Africa. 46 ANCYL takes issue with ANC appointed researchers, Mail & Guardian, 23 February The Companies and Intellectual Property Registration Office (CIPRO) reveals that African Exploration Mining and Finance Corporation (Pty) Ltd, registration number 1944/018010/07, was established in It is a wholly owned subsidiary of the state-owned Central Energy Fund (Pty) Ltd. 48 State of the Nation Address by His Excellency Jacob G Zuma, President of the Republic of South Africa, at the Joint Sitting of Parliament at Cape Town on 10 February State mining company opens coal mine, declares oil from coal intent, Creamer Media's Mining Weekly, 26 February South Africa to officially launch state mining company, Mineweb, 22 February In response to Internal Question Paper no. 34 of 29 October 2010, the Minister stated that one mining right and 27 prospecting rights have been granted to AEMFC by the DMR. AEMFC has applied for a further 94 prospecting right and one other mining right. Chief executive of AEMFC, Sizwe Madondo, claims that AEMFC has been granted 27 prospecting and mining rights, but has applied for 128 prospecting and mining rights in total. ["AEMFC is new hope for BEE mine firms", IOL, 28 February It is noted that Sizwe Madondo's statement is not in line with the Minister's response to Internal Question Paper No. 34.] 13

14 African Exploration was resuscitated, 52 the then Minister, Buyelwa Sonjica, purported to exempt it from the key licensing provisions of the MPRDA ("the exemption"). 53 The exemption itself may be unlawful as it is an established principle of South African public law that all administrative acts are clearly authorised by law. The Minister appears to have misused a statutory power intended to assist with the construction of public infrastructure by exempting African Exploration from the formal requirements of the MPRDA for a potentially illegitimate purpose (ie the commercial advancement of the state owned mining company as opposed to the construction of public infrastructure). 54 Despite its regulatory advantages, the assets and prospects of African Exploration indicate that, without a substantial injection of state funded capital, it is unlikely to prosper. 55 As a poignant example, the state owned diamond mining company, Alexkor Limited ("Alexkor"), failed to report any profits between 2005 and It is significant that in this year s budget, no funds appear to have been allocated to African Exploration directly. African Exploration, for now, will have to rely on funding from the Central Energy Fund. 57 Since its revival in 2007, African Exploration has received R64.5 million in funding from the CEF, in addition to the R130 million it received for the start-up costs associated with the launch of its first coal mine. 58 President Zuma, in opening African Exploration's first mine on 26 February 2011, remarked that "[the] role of the state cannot merely be confined to that of a 52 The AEMFC was established by the South African government in 1944 and registered at the Companies and Intellectual Property Registration Office ("CIPRO") under the registration number 1944/018010/07. This company lay dormant for decades and until recently was an unused subsidiary of the Central Energy Fund ("CEF"). 53 The exemption notice was published in the Government Gazette number on 10 October The notice exempts AEMFC from sections 16, 20, 22 and 27 of the MPRDA in so far as it relates to any activity to prospect, mine and the removal of any mineral for accumulating and stockpiling for purposes of security of supply and purposes incidental thereto. Sections 16, 22 and 27 relate to the formal requirements for the application for prospecting rights, mine rights or permits while section 20 relates to the permission necessary to removal minerals on site. 54 In this particular case the Minister has relied upon a provision in the MPRDA intended to exempt state agencies engaged in "road construction, building of dams or [some other similar] purpose" from certain regulatory requirements of the MPRDA. The exemption notice relies upon section 106(1) of the MPRDA which states that, "[t]he Minister may by notice in the Gazette, exempt any organ of state from the provisions of sections 16, 20, 22 and 27 in respect of any activity to remove any mineral for road construction, building of dams or other purpose which may be identified in such notice. 55 South Africa to officially launch state mining company, Moneyweb, 22 February DA: Nationalisation? Just look at Alexkor, Sunday Times, 30 September Estimates of National Expenditure, by the National Treasury 2011, which refers to the future drafting of a Mining Company Bill to administer the soon to be created state mining company under the auspices of the DMR Annual Report, Central Energy Fund, 29 July 2010 at

15 regulator... [it] must actively participate in the mining industry to ensure that [the] national interest is protected and advanced". 59 Having said all this, there are several fundamental problems with the notion of a state-owned mining company: it sets the state up in competition with the private sector; it makes the state both player and referee in a situation where African Exploration already benefits from a key regulatory exemption; and it may presage further advantages, by, for example, granting it a free carry or interest in new prospecting or mining rights. Some of these concerns could be addressed by: the removal of African Exploration s licensing exemption; the introduction of an independent industry regulator on the Brazilian 60 and Ghanaian model; 61 ensuring that it competes for rights on the same basis as the private sector and is not unfairly advantaged by taxpayer-funded subsidies. Positive signs from the Department of Mineral Resources In the midst of concerns about unfettered administrative discretion and maladministration by the DMR, not to mention socio-economic transformation, mine nationalisation and the official launch of African Exploration's first coal mine, the Minister has announced (and in some cases already implemented) a series of measures, which should result in the general improvement of South Africa's regulatory environment. 59 Zuma launches state-owned mining company in South Africa, African Business Review, 26 February Brazil has announced the imminent implementation of an independent National Mining Agency to replace the National Department of Mineral Production. In 1998 the project to replace the DNPM with the Agência Nacional de Minera ão ("National Mining Agency") began. See Machado and Figueiroa 500 Years of mining in Brazil: a brief review, published by Departmento de Geociencias Aplicadas ao Ensino, Instituto de Geociencias, Universidade Estadual de Campinas, Campinas, 15 February The Minerals Commission of Ghana ( the Minerals Commission ) was established with the enactment of the Minerals Commission Act, Under the Act, the Minerals Commission is responsible for the "regulation and management as well as the utilisation of minerals. 15

16 First, the DMR announced a six month moratorium on all new prospecting right applications, while conducting an internal audit into those that had been granted. 62 On 7 February 2011, the Minister announced that the auditing process had highlighted several problems: inconsistencies in the granting of rights, clear instances of bureaucratic inefficiency as well as a lack of transparency in the granting of prospecting rights. 63 In particular, the Minister highlighted the detrimental effect these shortcomings have had on the development of the mineral complexes of the Mpumalanga and Limpopo Regions. 64 Next, the DMR announced the introduction of a new electronic mineral management system ( the new electronic mining title system ), to be implemented this month. The new electronic mining title system will add greater transparency to the process of applying for prospecting rights, mining rights and permits, though not, according to the Minister, at the cost of efficiency. 65 An electronic real time mining title system not only enhances transparency, but limits opportunities for corruption, as much as insider dealing in the licensing process, while promoting administrative efficiency and good governance. Finally, the DMR is in the process of amending the MPRDA during the course of this year with a view to bring about greater regulatory certainty. Both the outgoing Director General of the DMR, Sandile Nogxina, as well as the Minister, have publicly acknowledged ambiguities in the MPRDA that need to be clarified, with administrative discretion identified as an area of particular concern. 66 To this end, the Minister has identified a number of gaps in the law, such as the difficulty in awarding rights in relation to associated or mixed minerals, as well as limiting the scope for excessive administrative discretion in the MPRDA The announcement of the moratorium was made by the Minister on 17 August 2010 and was originally intended to be in place between 1 September 2010 and 28 February The Minister, however, in the Government Gazette number published a Government Notice number 160 on 28 February 2011 which extended the moratorium until 30 September 2011 for the Mpumalanga Region and 31 March 2011 for the rest of the country. 63 Address by Minister Susan Shabangu: New Electronic Mineral Management System and its implications for the Regulatory Framework at Cape Town, on 7 February Ibid. 65 Ibid. 66 Minister s mining industry stability measures win support, Creamer Media s Mining Weekly, 18 August Minister's mining industry stability measures win support, Miningweekly, 18 August

17 Conclusion This is a critical time for South Africa's mining industry. The Kumba and Lonmin sagas have undoubtedly caused considerable collateral damage to South Africa's reputation as a safe investment destination as evidenced by the country's precipitous decline in the Fraser Institute's rankings for At the same time, the Minister's recent announcements of a new electronic mining title system, the ongoing audit of rights by the DMR and the prospect of significant amendments to the MPRDA this year may presage a better future for the mining industry. While it is obviously concerning that these positive steps are taking place against ongoing calls by the ANC Youth League for the industry's nationalisation, an issue which may only be resolved in December 2012, current collaborative efforts between government, labour and business to address the negative perceptions in the industry may hopefully bring about a different era for the South African mining industry. 17